Forex Trading Strategies in 2020
In this how to guide, we explain some of the proven Forex trading strategies in 2020 that you can implement today. Forex trading is attractive because of the potential high reward when you get the trades right, but when you lose, you can lose big.
That is why Forex trading is not for the faint-hearted. It takes guts, time and being open to learn from other traders who have travelled the road before you.
If there is one thing I know from spending three decades in the business world: the most successful people I know are teachable and willing to learn from others.
If you take the time to discover, listen and put into practice the proven Forex trading strategies used by the top Forex traders in the world, you can save yourself a lot of pain and potential financial losses in the long run.
Forex traders have a multitude of strategies and different techniques to identify the best entry and exit points, as well as the timing, to buy and sell currencies.
There are always improvements to existing Forex strategies and new techniques and tools for analysing the market, so it is important to keep abreast of Forex news.
A solid Forex trading strategy or set of strategies that other traders have used extensively with great success, will empower you with the confidence to stick with the strategy you selected, especially when you are tempted to trade outside it.
A good Forex trading strategy has four key elements to it: analysing the market, recognising specific market indicators and conditions, then confidently executing trades using that strategy, and using sound risk management.
Why do I need a Forex trading strategy?
Simply put a Forex trading strategy is a system you will use to determine when to buy or sell a currency pair.
The exchange rate between two countries is expressed by comparing their currencies, hence trades are done in currency pairs.
Some of the determinates of the exchange rate between two countries include differences in interest rates, inflation, current account deficits, public debt, terms of trade, economic performance and more. Currencies are also affected by the political climate of a country, geopolitical tensions between countries and even a global health crisis like the Coronavirus.
This information provides certain “signals” indicating to you that it is time to buy or sell a particular currency pair.
These trading signals are provided in a variety of ways through your broker platform and will be discussed later in this article.
Today’s hi-tech tools can also automate the process of watching out for trading opportunities, sending you an alert when found, and they can even make trades for you based on a particular strategy.
These platforms use robots or bots to sift through all the info for you, analyse it for potential opportunities, and provide a trading signal for you to act upon.
Of course, if you have time on your hands and have good analytical skills, you can do your own analysis as well as create your own Forex trading strategies. There is no one size fits all approach in trading, but why go through all the hassle when others can show you the way?
Which trading strategy is best?
There are a lot of trading strategies out there, so how do you go about choosing the right one for you?
It is important to understand Forex analysis, two key Forex trading strategies, especially when you are a beginner trader.
Fundamental analysis and technical analysis
Analysis is critical to almost every trade you will ever make on the foreign exchange. Whether you use the analysis provided by your broker or expert adviser, as a trader you must still know everything you possibly can about both analysis types.
Fundamental analysis is where a trader inspects fundamental indicators of an economy to try determining if a currency is under or overvalued, and how this value will move relative to another currency.
Fundamental analysis considers the value of the currencies and Forex traders are interested in the difference between a currency’s value and the price it is trading at.
Technical analysis is different as you will find out below, but in essence technical analysis is about the price action and the supply/demand of the currency.
Many brokers provide fundamental analysis on their platforms, however if you want to learn to do this yourself there is a plethora of information on the web as well as Forex training courses to get the knowledge.
Pros and Cons
|Increases your knowledge of global markets and the world economy||Too much information to process – can be confusing|
|You can explain unexpected movement of prices||Difficult to pinpoint specific entry and exit points to trade|
|Better for predicting longer term Forex movement||Short term news can give a false signal|
|Can be lucrative if you are able to predict and capture large news driven price movements||News may already be priced in|
|Need a knowledge of economics|
|Dramatic price movements of a pair (up and down) may take place as the market digests news – inexperienced traders may have big losses
Technical Analysis is a strategy that is immensely popular with Forex traders. Technical analysis involves reviewing past and current price trends on charts to predict where a currency may move next.
Technical analysis gives a lot of traders the comfort of a scientific and objective way to buy and sell currencies and so it is universally used.
Pros and Cons
|Provides specific entry and exit points||Multiple traders could trigger a reverse in price movement|
|Easy to identify a trend immediately||The tools are lagging indicators not always right|
|Focuses on charts and indicators||If you focus on charts only, you may miss other signals that could change the trend|
|More precise trading|
|Help traders plan profits and stop losses more accurately|
Trend Trading Strategy
Trend trading is a price action Forex trading strategy that works for many traders.
A trend is where currency prices move in a certain direction over a period – long, short, up, down, or sideways. When you are trend trading you are basically following the direction of price.
The idea is to choose entry and exit points based on where the currency price is within that trend to make a profit.
Trend trading is usually a medium to long-term strategy where you make a lower frequency of trades. This trading strategy is far less stressful compared to day trading and you would spend less time placing orders in a day. Most traders spend about 15 minutes a day placing orders.
Pros and Cons
|Large number of trading opportunities||There are many trend indicators which can be confusing|
|Beneficial risk reward ratio||Need a strong understanding of technical analysis|
|Better to trade off the bigger picture||Trend indicators lag price action|
|Less stressful||Most trends have periods of consolidation or retracement backwards – you could lose your profits if you exit at the wrong time|
|Multiple opportunities to enter in during a retracement||Markets trend only 25-35% of the time|
|Disciplined and patient traders will do well in this strategy
Day trading strategy
Day trading is also a price action trading strategy. With day trading your goal is to make a profit by capturing the intraday volatility of the day. The idea is to capitalise on small price movements in highly liquid currencies.
Day trading is action packed because you need to be constantly watching the market and is a short-term strategy which involves opening and closing trades on the same day. It involves trading with short timeframes anywhere between 1, 5 and 15 minutes.
The idea with Forex day trading is to make small gains through lots of trades throughout the day.
It is worth noting that other Forex strategies are used within day trading such as news trading, trend trading, counter-trend trading, and breakout trading.
For example, day traders trade off the news of the day to profit from any short-term market moves following the announcement. They trade off the economic calendar and scheduled announcements such as economic statistics, interest rate changes, and other news.
Pros and Cons
|If you are good you can make money most months||Stressful watching markets all the time
|No overnight risk||High opportunity cost (time vs return)|
|You make money faster||Very time intensive|
|There are a variety of trading strategies to use across all markets||You lose money faster|
|For full-time traders only|
|Exceedingly difficult to gain and keep a positive edge|
|Your confidence could take a knock on the losses|
Another price action strategy Swing Trading is a common one where you capture one swing in the market in just one move. A trader will enter low and sell on the high trend.
Swing trading is not as time consuming as day trading, the average swing trader will spend anywhere between one to maximum four hours a day trading. And these trades are held anywhere from a few hours, days or even weeks.
Swing traders also trade many markets at the same time.
Pros and Cons
|If you are good you can make money in most quarters||You will not be able ride trends with this strategy|
|You can trade this strategy part-time||It does carry overnight risk|
|Enables you to take advantage of the upswing and the downswing||You are risking your money on a lot of trades so you will have losses|
|Multiple opportunities in the market||Needs strong technical analysis skills|
|Involves technical analysis so you will know when a trade is working against you||‘Nerves of steel’ are required from the trader – pullbacks appear more violent than if you are looking at a weekly chart|
|Stop losses are smaller than longer term trades so you can place larger size positions vs those with low leverage|
Position trading is just what the name suggests, holding a particular position over weeks, months and potentially even years.
Using this price action strategy, position traders will base their position on long-term macroeconomic trends of an economy or a variety of economies.
Because your strategy is to profit on large price movements over a long time, as a position trader you will make small trade sizes using low leverage.
In addition, you will need to become well versed with fundamental and technical analysis to choose your entry and exit levels.
Pros and Cons
|You can potentially catch major currency moves because you can hold stocks as they move||A lot of patience is needed|
|Does not require a lot of time or activity||Capital is tied up for long periods|
|Because you are not concerned with short term price fluctuations, you have less stress||Small fluctuations that are ignored can become full trend reversals and you could lose money|
|Not as risky as scalping, swing, or transition trading||Must have knowledge of fundamental analysis and technical analysis|
|Less than an hour a day||Fewer trades can mean lower profits|
Range trading is another price action strategy. The Forex market exhibits price ranges and it sometimes fluctuates within specific limits. Support is the price a currency is not likely to go below, and resistance is a price a currency is not likely to exceed.
Using technical analysis, you would identify the ranges and set up trades to potentially profit off them. You are looking to buy at the bottom of the range and sell at the top.
Pros and Cons
|Good when the market is fairly stable / not showing patterns of a trend||There is a big-time requirement|
|Opportunity to profit quickly off trading range breakouts if you are experienced that is||Forex currencies only trends 20% of the time
|You can start with small funds||Attracts other traders which can create volatility|
|This strategy gives us clear levels to work between||Costs to broker are expensive|
|Will only fluctuate between certain highs and lows for a while|
Scalping is about taking small profits from multiple open and close positions and is a type of price action and day trading strategy.
The aim of scalping is to take small profits from a lot of trades which results in a substantial profit by the end of the day.
Today most Forex traders will take advantage of automated tools within a set of parameters they setup of when to enter and exit positions.
Pros and Cons
|Great number of trading opportunities throughout the day in short timeframes||Large time investment / you need to be active in front of your screen for a few hours each day|
|No overnight risk||Increased transaction costs|
|Lowest risk to reward ratio||You must understand technical analysis|
|No fundamental analysis required||Unexpected news could reverse a profitable trade|
Carry trade strategy
A carry trade strategy in Forex is where you borrow a currency with a low interest rate, and with those funds buy another currency with a high interest rate. The interest rate difference is passed on when a Forex position is kept open overnight, that is why it is called carry trade.
The idea is to profit off the movement of the currency and the interest rate difference between the two countries.
Brokers often use the term Forex swap when informing you of the payout you will receive less any broker fees.
Pros and Cons
|Doesn’t require a big time investment||You can lose capital if the carry trade pair declines more than the gain in the interest rate|
|You can collect an interest payment every day if the differential is positive||You must be good at fundamental and technical analysis|
|Because it is done using leverage your return on capital is bigger||Is a long-term investment so interest rates can depreciate|
|Not many opportunities because you are holding positions|
Support and resistance strategy
This is a day trading strategy and the aim is to identify the support and resistance levels to select entry and exit points to trade and make a profit.
What is support? It is where the price of a currency tends to stop falling.
What is resistance? It is where the price of a currency tends to stop rising.
On a chart with any timeframe from minutes to hours to weeks, you will see where a price has moved up, hit resistance and then reversed, or you will see the price has moved down, hit a support level and bounced back up.
The idea is to buy when the support level is reached and sell when the resistance level is reached.
Pros and Cons
|It is a predictable to trading strategy||Nothing is ever completely certain, a price can break either of the levels|
|Excellent profits if things go as planned||There can be a false break|
|Variety of charts to identify support and resistance levels||Strong understanding of technical analysis is needed|
Using a breakout trading strategy you are anticipating a forthcoming move and entering the trade at the right moment to capitalise off this price breakout.
A breakout is a sudden price move that is out of the markets current trading range and is very difficult to predict. This breakout is usually formed by a spike in volume as traders attempt to profit from an opportunity – the price breakout could come from either the support or the resistance level.
Pros and Cons
|Caught at the right time a breakout can bring massive profits||Getting consistent profits is challenging|
|Limited risk||Time spent on searching for the right setup|
|Market entry and exit are predetermined with stop losses and profits already set||It may be a false breakout which is difficult to predict|
|Precision is required to take advantage of the breakout|
In the beginning you should experiment with many different Forex strategies to see which one suits your personality, lifestyle, and financial goals. Most brokers give you a demo account to try for free and that is where you can play.
Having a tried and tested Forex trading strategy is important as you found out from these proven Forex trading strategies in 2020, however of equal importance is finding a strategy that works for you.